MDP408a

Production & Operations

Management (Facilities Planning)
Lecture #15
Facility Location
 Today’s lecture

• Facility location problem

• Analytical methods for facility location
selection:
– Factor Rating
– Cost-Profit-Volume analysis
– Center of Gravity Method, and
– Transportation and Simulation Models.
 FACILITY LOCATION
Once a firm has decided to open a new
facility or relocate an existing facility,
It must decide where that facility should be
located.
 FACILITY LOCATION
• Facility location problem involves the
evaluation of various sites for a new facility.

• There are several factors that influence the

Facility Location Decision:
 Factors Related to Resources
• Labor availability, Labor cost, Labor Skills;
• Materials Availability, Material cost, material quality;
• Land availability, Land suitability, Land cost;
• Energy availability, energy cost;
• Water availability, water quality, water cost.
Factors Related to the Market

Proximity to the
firm’s market, size
of the market,
potential needs of
the market.
 Factors Related to the Infrastructure
• Availability of Financial Institutions, Strength of
Financial Institutions
• Government Stability, Government taxes, Import and
Export restrictions.
• Quality of life, Cultural issues,
• Environmental regulations, Transportation
availability, Transportation cost
 FACILITY LOCATION
• There are many analytical techniques that can
be used in facility location decision.
• Some of these are:
1) Factor Rating
2) Cost-Profit-Volume analysis
3) Center of Gravity Method, and
4) Transportation and Simulation Models.
 Method of Factor Rating
• In factor rating method, first we must identify
the Most Important Factors in evaluating
alternative sites for the new facility.
• Then we should assign a weight between 0
and 100 to each of these factors.
 Method of Factor Rating

Each alternative location will then be rated

based on these factor weights.
The most weighted alternative is selected as
the best alternative.
 Example
• Samson Ltd. is considering three alternative sites for
its new facility.
• After evaluating the firm’s Needs, the Managers have
Narrowed the list of Important Selection Criteria
down into three major Factors.
- Availability of skilled labor
- Availability of Raw materials, and
- Proximity to the firm’s markets.
 Example

• Weights reflecting the relative importance of

each factor have been assigned as follows:
 Example

• Based on these criteria, the three

Alternative sites were scored between 0
and 100 points:
 Example

• Now we will multiply each score by its

corresponding factor weight:
• Weighted scores are calculated as:
(Site Score)x(Factor Weight)
 Example
• From these results, the largest total weight is
for Site A. It appears to be the best location.
 Example
• What happens if we change the factor
weights. Let’s use the following factor
weights:
• Skilled labor: 0.45; Raw Materials: 0.40; and
Market: 0.15
• Then the following results are obtained:
Example
 Example
• In this case, Site C appears to be the best
choice with largest weight score.
• Therefore, factor rating method is very
sensitive to the weights assigned to each
factor.
 Another Example
You can use similar analysis to decide where to live. This is an
example showing the kind of factors that you may consider.
 Important!
• Since factor weights, selected factors, and
assigned scores are all determined
subjectively, the managers should be very
careful in selecting these items and numbers.
Cost-Profit-Volume Analysis

When the fixed and

variable costs for each
site differ, Cost-profit-
volume analysis can
be used to identify the
location with the
lowest cost.
 Example
• Foster Paper Ltd. is considering three
alternative sites for its new production facility.
• The Annual Production Cost associated with
each alternative is a linear function of the
production volume. That is:
 Example
Total Production Cost = (Fixed Cost) + (variable
unit cost) x (annual production volume)

• Assume that The expected annual production

volume is 250,000 units.
• And further assume that:
• 𝑥 : production volume = 250,000
 Example

For Site A: Prod. Cost = 10,000,000 + 250 𝑥

For Site B: Prod. Cost = 25,000,000 + 150 𝑥
For Site C: Prod. Cost = 60,000,000 + 50 𝑥

• Based on these information, Which site has the

lowest cost?
 Example
• At a production volume of 250.000 units, site B has
the lowest cost, because
• For Site A: Prod. Cost = 10,000,000 + 250 (250,000) =
72,500,000
• For Site B: Prod. Cost = 25,000,000 + 150 (250,000) =
62,500,000
• For Site C: Prod. Cost = 60,000,000 + 50 (250,000) =
72,500,000
Example
 Example
• This graph shows that annual production cost
changes with different production volumes.
• If the expected annual production volume is below
150,000 units, then choose site A.
• If the expected annual production volume is
between 150,000 and 350,000 units, then choose
site B.
• If the expected annual production volume is over
350,000 units, then choose site C.
 Center of Gravity Method
• The center of gravity method is used to find a
location that Minimizes the Sum of
Transportation Cost in between new facility
and old facilities.
• Transportation cost is assumed to be a linear
function of the Number of Units Shipped AND
the Traveling Distance.
 Center of Gravity Method
• The location of the firm’s existing facilities are
converted into x and y coordinates.
• The following center of gravity equations are
Then used for calculating the x and y
coordinates for the new facility:
Center of Gravity Method
 Center of Gravity Method
• Here, Cx : x coordinate for new location
• Cy : y coordinate for new location
• i: index for existing locations
• n: total number of existing locations
• xi: x coordinate of existing ith location , and
• yi: y coordinate of existing ith location.
 Example
• Aldrich Manufacturing Company plans to build
a Warehouse to serve its Distribution Centers
in Columbus (Ohio), Frankfort (Kentucky),
Nashville (Tennessee), and Richmond
(Virginia).
Example
 Example
• The number of units to be shipped monthly
from Harrisburg to the Distribution Centers
are shown in the following table:
• (Weighted Coordinates are calculated as:
(Annual Shipping Volume) (x or y coordinate))
Example
 Example
• Using the equations of center of gravity:
• Cx = 2,040,000 / 10,000 = 204 (x coordinate for
new facility)
• Cy = 1,185,000 / 10,000 = 118.5 (y coordinate
for new facility)
• The nearest city to (204, 118.5) Charleston at
West Virgina.
 Example
• This method only considers the distances
traveled. It does not consider the other factors
such as the availability of roads on the
selected location. Therefore, applying solely
this method may not be applicable in every
cases.
 Transportation Model

A special form of linear

programming, that is
Transportation Model,
can be used to compare
the total transportation
cost associated with each
alternative site.
 Transportation Model
• The transportation model technique can be
used to determine how many units should be
shipped from each plant to each warehouse
To Minimize Total Transportation Cost.
 Example
• Straub Ltd. has three plants running at full
capacity in Des Moines, Racine, and Gary.
• These plants supply four Distribution
warehouses in St. Paul, Milwaukee, Chicago,
and Detroit.
 Example
• Straub plans to build a new plant. It has narrowed
down the choice of sites to two possibilities:
Kalamazoo and Duluth.
• We will now determine which site results in the
lowest transportation Cost by using the unit
transportation costs, warehouse demands, and plant
capacities shown in the following:
Example
Example
 Example
• We will approach this problem in the following
manner:
• We will first assume that the selected plant is
the Kalamazoo plant, and calculate the total
transportation cost.
 Example
• Later, we will assume the selected plant is
Duluth. Then we will compare the
transportation costs for both plants.
• Now, the first step is to find the Optimal
number of units to ship between each plant-
warehouse combination. This also gives the
optimal transportation cost for the problem.
 Example
• We can use any of the computerized LP tools
for finding the optimum values for this
problem.
• We use Excel Solver to solve this
transportation model.
• The result is as follows:
Example
 Example
• The total transportation cost will be $10,225 if the
new plant is built in Kalamazoo.
• (This can be calculated simply by multiplying the
shipment in each cell by its unit cost)
• On the other hand, The optimal number of units to
ship between each plant and Duluth Warehouse is
found as follows:
Example
 Example
• The total transportation cost will be $13,825 if
the new plant is built in Duluth.
• Therefore, the Kalamazoo plant will incur the
lowest transportation cost.
 Simulation Models

Firms often Consider many variables and Factors

when they choose a facility location.
 Simulation Models
These variables are often difficult to estimate
and they also change in time.
In these kinds of Dynamic Situations, Simulation
may be the best modeling technique.
 Simulation Models
Simulation models allow managers to examine a
range of Scenarios.
However, the determination of the parameters
in a simulation is also a challenging task.
Also, developing a simulation model may take
considerable time and effort.